Can an Arbitrator Order Prehearing Discovery from a Nonparty?

By Lisa M. Eddington and Howard S. Suskin – November 17, 2011

In arbitration proceedings conducted by the Financial Industry Regulatory Authority (FINRA) and other securities self-regulatory organizations, issues often arise as to the permissible scope of discovery. When parties to an arbitration seek judicial enforcement of arbitrators’ discovery subpoenas, courts have not always agreed on what the Federal Arbitration Act (FAA) allows. One particular issue on which the courts are divided is whether an arbitrator may order pre-hearing discovery from a nonparty and whether the courts are authorized under the FAA to enforce such subpoenas. This article discusses the current split among the courts on this topic.

Currently, the courts are divided regarding the proper interpretation of section 7 of the FAA and, specifically, whether that section grants an arbitrator the authority to order pre-hearing discovery from nonparties. The Sixth and Eighth Circuits have held that implicit in the power to order the production of documents from a nonparty at a hearing is the power to order pre-hearing document production from a nonparty. The Second and Third Circuits disagree, finding that section 7 of the FAA unambiguously limits an arbitrator’s subpoena power to instances in which the nonparty has been called to appear before the arbitrator. Although generally following the Second and Third Circuits, the Fourth Circuit has suggested that an exception might be appropriate upon a showing of special need or hardship.

In reaching their decisions, the circuits have viewed the goals of arbitration differently. On the one hand, some have reasoned that the efficiency of the arbitration process may be reduced if, especially in complex cases, parties are not afforded the opportunity to review and digest relevant evidence prior to an arbitration hearing. On the other hand, some courts have reasoned that allowing pre-hearing discovery from nonparties will lessen the incentive to limit the scope of discovery and strengthen the incentive to engage in costly and time-consuming fishing expeditions.

Section 7 of the Federal Arbitration Act
The key provision governing discovery from nonparties in arbitrations is found in section 7 of the FAA, which provides in pertinent part as follows:

The Sixth and Eighth Circuits’ Implicit Power
In American Federation of Television and Radio Artists, AFL-CIO v. WJBK-TV (New World Communications of Detroit, Inc.), 164 F.3d 1004 (6th Cir. 1999), a party sought to enforce a subpoena that directed a nonparty to appear and produce documents prior to the arbitration hearing. The Sixth Circuit looked to section 7 of the FAA for guidance in deciding whether the district court had authority to enforce the subpoena under section 301 of the Labor Management Relations Act and found that section 7 “implicitly include[d] the authority to compel the production of documents for inspection by a party prior to the hearing.” Id. at 1009. The court, however, did not reach the question of whether the arbitrator may subpoena a third party for a discovery deposition relating to a pending arbitration proceeding. Id. at 1009 n.7.

Similarly, in In re Security Life Insurance Co. of America, 228 F.3d 865 (8th Cir. 2000), a third party was subpoenaed to produce documents prior to an arbitration hearing. The Eighth Circuit held that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” Id. at 870–71. In reaching its decision, the court reasoned that “[a]lthough the efficient resolution of disputes through arbitration necessarily entails a limited discovery process . . . this interest in efficiency is furthered by permitting a party to review and digest relevant documentary evidence prior to the arbitration hearing.” Id. at 870.

The Second and Third Circuits’ Restricted Power
In Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004), the court looked first to the text of section 7 in deciding whether a nonparty can be subpoenaed to produce documents prior to a hearing. The court found that the language unambiguously restricts an arbitrator’s subpoena power to situations in which the nonparty has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time. Id. at 407. In reaching its decision, the court relied on the language requiring a nonparty “to bring” items “with him” as well as the word “and” in the first sentence of section 7. Id. The court noted that requiring document production to be made at an actual hearing may discourage parties from issuing large-scale subpoenas to nonparties because parties “will be forced to consider whether the documents are important enough to justify the time, money, and effort that the subpoenaing parties will be required to expend if an actual appearance before an arbitrator is needed.” Id. at 409. The court noted that if pre-hearing document production from nonparties were permitted, there is “more incentive to engage in fishing expeditions that undermine some of the advantages of the supposedly shorter and cheaper system of arbitration.” Id.

The Second Circuit in Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210 (2d Cir. 2008), joined the Third Circuit in holding that section 7 does not authorize an arbitrator to compel pre-hearing document discovery from a nonparty. As in Hay Group, the court found the language of section 7 to be straightforward and unambiguous, noting that although “[t]here may be valid reasons to empower arbitrators to subpoena documents from third parties, [the court] must interpret a statute as it is, not as it might be . . . ” Id. at 216.

The Fourth Circuit’s Showing of Special Need or Hardship
In COMSAT Corp. v. National Science Foundation, 190 F.3d 269, 275 (4th Cir. 1999), the Fourth Circuit generally took the approach that the Second and Third Circuits would later take, finding that the FAA does not grant an arbitrator the authority to order nonparties to appear at deposition or to demand pre-hearing document production from nonparties. Unlike the Second and Third Circuits, however, the court suggested, in dicta, that a court might, under unusual circumstances, compel the pre-hearing production of documents from a nonparty upon a showing of special need or hardship. Id. at 276. The court acknowledged that the rationale for constraining an arbitrator’s subpoena power is clear: A “hallmark of arbitration—and a necessary precursor to its efficient operation—is a limited discovery process.” Id. The court reasoned, however, that in a complex case, “the much-lauded efficiency of arbitration will be degraded if the parties are unable to review and digest relevant evidence prior to the arbitration hearing.” Id. The Fourth Circuit did not define “special need” but noted that, at a minimum, a party would be required to demonstrate that the information it seeks is otherwise unavailable. Id.

The Northern District of Illinois’s Recent Holding
Most recently, the Northern District of Illinois addressed this issue in Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, No. 11 C 3276, 2011 WL 3489807 (N.D. Ill. Aug. 9, 2011). In Alliance, nonparties received subpoenas calling for oral testimony and production of records before a member of the arbitration panel at a preliminary hearing. Id. at *1. The court recognized the split in the circuits over the arbitrator’s ability to order pre-hearing discovery from a nonparty. Id. at *2. However, relying in part on Hay Group, the court held that any rule against compelling nonparties to participate in discovery does not apply to a situation in which the nonparty is summoned to appear at a pre-hearing conference before any of the arbitrators and bring documents with him. Id. The court further found that nothing in the language of the FAA states that an arbitrator’s subpoena power can be invoked only at the time of the final hearing. Id.

Conclusion and Practical Considerations
The current split among the courts as to the scope of pre-hearing arbitration discovery undermines the national uniformity in the arbitration process that the FAA was designed to promote. Ultimately, the U.S. Supreme Court may be called upon to resolve the split among the circuits regarding the proper interpretation of the FAA, unless Congress steps in first and clarifies the FAA’s provisions. To date, however, none of the parties in the cases discussed above have sought U.S. Supreme Court review. So, it may be a long time before the split is resolved.

Predicting how the Supreme Court would resolve the split is not easy. On the one hand, in strongly favoring enforcement of arbitration agreements, the Supreme Court has expressed its view that arbitration procedures afford parties a full and fair mechanism to resolve their disputes. For that reason, the inability of parties to enforce arbitrators’ subpoenas against nonparties under the FAA might lead the Court to take an expansive approach in facilitating that discovery. On the other hand, the Supreme Court also has recognized that arbitration procedures, including the availability of discovery, are more limited than what is available under the Federal Rules of Civil Procedure. As a result, the inability of parties to conduct discovery from nonparties might not be of great concern to the Court.

As long as the lower courts are split, attorneys handling FINRA and other self-regulatory organization arbitrations need to be up-to-date about the law on this issue in the particular jurisdiction in which they are arbitrating. Parties seeking to enforce arbitrators’ subpoenas may do so under section 7 of the Federal Arbitration Act only in the U.S. district court for the district in which the arbitrators, or a majority of them, are sitting. Seeking enforcement from another court where the nonparty may be located is not an option. Therefore, when a claimant has a choice of places in which to conduct the arbitration, knowing how that district’s courts have weighed in on discovery from nonparties may be one factor to consider in selecting the arbitration forum, particularly if significant discovery from nonparties will be needed.

Lisa M. Eddington is of counsel and Howard S. Suskin is a partner in the Chicago, Illinois, office of Jenner & Block LLP.

Keywords: securities litigation, Federal Arbitration Act, circuit split, NDILL, FINRA

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